# COMMISSIONER OF INCOME-TAX, BOMBAY v. AHMEDBHAI UMARBHAI & CO., BOMBAY - **Citation:** [1950] 1 S.C.R. 335 - **Court:** Supreme Court of India - **Decided:** 1950-05-04 - **Bench:** Shri Harilal Kania G~ Saiyid F Azl Ali, Patanjali Sastri, Mehr Chand Mahajan, Mukherjea, Das - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-bombay-v-ahmedbhai-umarbhai-co-bombay-130 - **Pages:** 56 ## Headnote E.vcess Prnjits Tax Act (XV of 1940), s. 5, Third Pt·ovisoIndian Incom$-tax Act (XI of 1922), s. 42 (8)-Article manufactttred otttside British India-Sale in British India-Whethu whole profits accriie or arise in British India-Liability to excess pt·ofits taxManufacturing operations, whether "part of !msiness " - Aprortionment of profits between place of mamifact11re and place of salePermissibility-Applicability r>f s. 42 (8}. Section 5 of the Excess Profits Tax Act, 1940, provided that "the Act shall apply to awry business of which any part of the profits made during the chargeable accounting period was chargeable to income-tax." There was also a proviso to the effect that "the Act shall not apply to any business, the whoie of the profits of which accrued or arose in an Indian State and that where the profits of a part of a business aoorued or arose in an Indian State, such part shall for the purpose of this provision be deemed to be a separate business, the whole of the profits of which accrued or arose in an Indian State, and the other part of the business shall be deemed to be a separate business." A firm which was resident in British India and carried on the business of manufacturing and selling groundnut oil, owned some oil mills within British India and a mill in Raichur in the Hyderabad State where oil was manufactured. The oil manufac· tured in Raichur was sold partly within the State of Hyderabad and partly in Bombay : Helil,. lnJ the Fitll Com·t (KANIA C. J., PATANJALI SASTRI, FAZL ALI, MEHR CHAND MAHA.JAN, MUKHERJEA and DAS JJ.)- The expression "part of a business" in the provieo to section 5 does not necessarily mean a separate composite unit of all the constituent activities of the business or a complete cross·section of the entire business operations but is wide enough to mean one or more of the operations of the business, and that the manufacturing operations which the firm carried on at Raichur were "a part of tho business" of the assessees within the meaning of the proviso. to section 5 of the Act. Held also pe1· K~NIA C .. J., FAZL ALI, :\IEHH CHAND l\LULUAN, l\11.."KHEHJEA and DAS J.J.-that the profits of that part of the business, namely, the manufacture of oil at the mill in Raichur accrued or arose in Haichur within the meaning of the said proviso, even though Lhe manufactured oil was sold in Bombay and the price was received there, and accordingly, that part of the profits derived from sales in Bombay which was attributable to the manufacture of the oil in Haichur was exempt from excess profits tax nnder the proviso to section 5 of the Act. ~2-A 195fl May 4 1950 Co111111issio1tcr of /Jtco1uc-tax, Bo111fJay v. Aluucdbhai U111arbhai & Co. 336 SUPREME COURT REPORTS [1950) Per P.\TANJALI SAS TRI J.-The first part of sub-section (1) of section 42 of the Income-tax A.ct was applicable to the assessees, the expressions "business connection in British India" and '"asset or source of income in British India'' being wide enough to cover their selling organisation at Bombay ; and as a xesult, the profits received in Bombay from the sale of the oil manufactured in Haichur had to be apportioned under sub-section (3) of section 42 bet\veen the two operations of manufacture and sale, and only such portion of the profits as was attributable to the sale in Bombay should he deemed to have accrued or arisen in British India. It followed as a corollary that the rest of the profits attributable to the 1nanufacture at Raicbur rnust he regarded as accruing or arising in the Hyderabad State and w~s therefore exempt under the proviso to s. 5 of the Act. Q~tae9·e: \Vhether it is in consonance with business principles or prA.ctice in the absence of any statutory requirement to that effect to cut business operations arbitrarily into two or more por .. tions and to 11pportion as between the1n the pro5Js resulting frorn one continuous process ending in a sale and \vhether Kirk's case is applicable to assessments under the Indian Act ## Text _Characters 0–39,954 of 128,990. This is a partial read: ask again with offset=39954 for what follows._ S.C.R. SUPREME COURT REPORTS 335 COMMISSIONER OF INCOME-TAX, BOMBAY v. AHMEDBHAI UMARBHAI & CO., BOMBAY. [SHRI HARILAL KANIA G~ SAIYID F AZL ALI, PATANJALI SASTRI, MEHR CHAND MAHAJAN, MUKHERJEA and DAS JJ.] E.vcess Prnjits Tax Act (XV of 1940), s. 5, Third Pt·ovisoIndian Incom$-tax Act (XI of 1922), s. 42 (8)-Article manufactttred otttside British India-Sale in British India-Whethu whole profits accriie or arise in British India-Liability to excess pt·ofits taxManufacturing operations, whether "part of !msiness " - Aprortionment of profits between place of mamifact11re and place of salePermissibility-Applicability r>f s. 42 (8}. Section 5 of the Excess Profits Tax Act, 1940, provided that "the Act shall apply to awry business of which any part of the profits made during the chargeable accounting period was chargeable to income-tax." There was also a proviso to the effect that "the Act shall not apply to any business, the whoie of the profits of which accrued or arose in an Indian State and that where the profits of a part of a business aoorued or arose in an Indian State, such part shall for the purpose of this provision be deemed to be a separate business, the whole of the profits of which accrued or arose in an Indian State, and the other part of the business shall be deemed to be a separate business." A firm which was resident in British India and carried on the business of manufacturing and selling groundnut oil, owned some oil mills within British India and a mill in Raichur in the Hyderabad State where oil was manufactured. The oil manufac· tured in Raichur was sold partly within the State of Hyderabad and partly in Bombay : Helil,. lnJ the Fitll Com·t (KANIA C. J., PATANJALI SASTRI, FAZL ALI, MEHR CHAND MAHA.JAN, MUKHERJEA and DAS JJ.)- The expression "part of a business" in the provieo to section 5 does not necessarily mean a separate composite unit of all the constituent activities of the business or a complete cross·section of the entire business operations but is wide enough to mean one or more of the operations of the business, and that the manufacturing operations which the firm carried on at Raichur were "a part of tho business" of the assessees within the meaning of the proviso. to section 5 of the Act. Held also pe1· K~NIA C .. J., FAZL ALI, :\IEHH CHAND l\LULUAN, l\11.."KHEHJEA and DAS J.J.-that the profits of that part of the business, namely, the manufacture of oil at the mill in Raichur accrued or arose in Haichur within the meaning of the said proviso, even though Lhe manufactured oil was sold in Bombay and the price was received there, and accordingly, that part of the profits derived from sales in Bombay which was attributable to the manufacture of the oil in Haichur was exempt from excess profits tax nnder the proviso to section 5 of the Act. ~2-A 195fl May 4 1950 Co111111issio1tcr of /Jtco1uc-tax, Bo111fJay v. Aluucdbhai U111arbhai & Co. 336 SUPREME COURT REPORTS [1950) Per P.\TANJALI SAS TRI J.-The first part of sub-section (1) of section 42 of the Income-tax A.ct was applicable to the assessees, the expressions "business connection in British India" and '"asset or source of income in British India'' being wide enough to cover their selling organisation at Bombay ; and as a xesult, the profits received in Bombay from the sale of the oil manufactured in Haichur had to be apportioned under sub-section (3) of section 42 bet\veen the two operations of manufacture and sale, and only such portion of the profits as was attributable to the sale in Bombay should he deemed to have accrued or arisen in British India. It followed as a corollary that the rest of the profits attributable to the 1nanufacture at Raicbur rnust he regarded as accruing or arising in the Hyderabad State and w~s therefore exempt under the proviso to s. 5 of the Act. Q~tae9·e: \Vhether it is in consonance with business principles or prA.ctice in the absence of any statutory requirement to that effect to cut business operations arbitrarily into two or more por .. tions and to 11pportion as between the1n the pro5Js resulting frorn one continuous process ending in a sale and \vhether Kirk's case is applicable to assessments under the Indian Acts as laying down any general principle of apportionment. Per MAHAJAN J.-Though profits may not be realised until a manufactured article is sold, profits are not wholly made by the act of sale and do not necessarity accrue a.t the place of sale a.nd to the extent profits are attributable to the manufacturing operations, profits accrue at the place where the operations are carried on. Per :i\fUKHERJEA J.-\Vhere raw material is worked up into a new prorluct by process of manufacture, it obviously increases in value and this increase in value represents the income or profit which is the result of the 1nanufacture, and a.s this profit accrues by rea.son of the tnanufacture it cannot but be locn.ted at the place \Vhere the inanufacturing process is gone through. It is im1naterial that the manufactured goods are sold later on at various places. If tho manufacturer is himself the seller, it might be that he receives the entire profits including that of the manufacture only at the tin1e of sale; but in an inchoate shape a portion of the profits does accrue at the pln.ce of manufacture, the exact a1nount of which is only n.scertrdned after the Sale takes place. For purposes of com· pntation the two parts of the business may be conceived of e.s being carried on by two different sets of persons. APPEAL [Civil Appeal No. LXVIII of 1949] from a Judgment of the High Court of Bombay dated 18th l\Iarch 1948 (Chagla C.J. and Tendolkar J.) in a Reference under the Excess Profits Tax Act, 1940. JYI. C. Setalvad, Attorney-General for India, (B. Sen with him) for the appellant. ICM. JY!unshi (S. K. Aiyar and N. K. Gamadia with him) for the respondents. 1950. )lay 4. The Court delivered the following Judgments:- S.C.R. SUPREME COURT REPORTS 337 KANIA C.J .-This is an appeal from a decision of the High Court of Judicature at Bombay upon a reference made by the Income-tax Appellate Tribunal, Bombay, under section 66 ( 1) of the Indian Incometax Act. The respondent firm, the assessees, carried on business of manufacturing and dealing in oil during the relevant accounting periods. They are a registered ' firm under the Income-tax Act and are residents in Bombay. They own three mills at Bombay and one at Raichur for manufacturing oil from groundnuts. The oil produced at Raichur is sold partly at Raichur and partly in Bombay. Their liability to pay incometax in respect of their whole profits is not disputed under the Incom~-tax Act. The question is in respect of their liability under the Excess Profits Tax Act for the oil manufactured at Raichur, but sold in Bombay. The assessees contend that in respect of such oil a portion of the profits earned by them is o.ttributable to theipbusiness of manufacturing oil at Raicbur and that portion of the profits should not be assessed to tax under the Excess Profits Tax Act. The taxing authorities rejected the contention of the assessees. The Income-tax Tribunal agreed with them. On a reference the High Court disagreed with the view of the Tribunal and held that the assessees' contention was correct. The Commissioner of Income-tax has come in appeal from that decision. In the Excess Profits Tax Act, section 2 (5) defines "business" as follows :- "'Business' includes any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture ..... . Provided further that all businesses to which this Act applies carried on by the same person shall be treated as one business for the purposes of this Act." Section 5 of the Act runs as follows :- · "5. This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income-tax by virtue of the provisions of sub-clause (i) or sub-clause (ii) of clause (b) of sub-section ( 1) of section 4 of the Indian Income-tax Act, 1922, or of clause (c) of that subsection: Provided that this Act shall not apply to any business the whole of the profits of which accrue or 1950 Co1n1nissioncf' of Inconie-tax 1 Bombay v. All11iedbhai V111arbliai & Co. :cania C. J. ]950 Co111111 issio1£cr of lncotne-tax, Bo111bay , .. Altuzedbl1ai Umarb/iai & Co. l(ania CJ. 338 SUPREME COURT REPORTS (1950] arise without British India where such business is carried on by or on behalf of a person who is resident but not ordinarily resident in British India unless the business is controlled in India : Provided further that where the profits of a part only of a business carried on by a person who is not resident in British India or not ordinarily so resident , accrue or arise in British India or are deemed under the Indian Income-tax Act, 1922, so to accrue or arise, then except where the business being the business of a person who is resident but not ordinarily resident in British India is controlled in India, this Act shall apply on! y to such part of the business, and such part shall for all the purposes of this Act be deemed to be a separate business : Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State ; and where the profits of a part of a business accrue or arise in an Indian State, such part shall, for the purposes of this provision, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other part of the business shall for all the purposes of this Act, be deemed to be a separate. business." Section 21 of the Act, which was not referred to in the course of the arguments before us, runs as follows:- " 21. The provisions of sections 4-A, 4-B, 10, 13, 24-B, 29, 36 to 44-C (inclusive), 45 to 48 (inclusive), 49-E, 49-F, 50, 54, 61 to 63 (inclusive), 65 to 67-A (inclusive) of the Indian Income-tax Act, 1922, shall apply with such modifications, if any, as may be prescribed as if the said provisions were provisions of this Act and referred to excess profits tax instead of to income-tax, and every officer exercising powers under the said provisions in regard to income-tax may exercise the like powers under this Act in regard to excess profits tax in respect of cases assigned to him under sub.section (3) of section 3 as he exercises in relation to income-tax under the said Act : Provided that references in the said provisions to the assessee shall be construed as references to a person to whose business this Act applies." ' S.C.R. SUPREME COURT REPORTS 339 The relevant portion of section 42 of the Indian Income-tax Act is in these terms :- " 42. (1) All income, profits or gains accruing or arising, whether directly or indirectly, through or from any business connection in - British India, or through or from any property in British India, or through or from any asset or source of income in British India, or through or from any money lent at interest and brought into British India in cash or in kind, shall be deemed to be income accruing or arising within British India, and where the person entitled to the income, profits or gains is not resident in British India, shall be chargeable to income-tax either in his name or in the name of his agent .... (2) Where a person not resident or not ordinarily resident in British India, carries on business with a person resident in British India, and it appears to the Income-tax Officer that owing to the close connection between such persons the course of business is so arranged that the business done by the resident person with the person not resident or not ordinarily resident produces to ,fhe resident either no profits or less than the ordinary profits which might be expected to arise in that business, the profits derived therefrom or which may reasonably be deemed to have been derived therefrom, shall be chargeable to income-tax in the name of the resident _.Jerson who shall be deemed to be, ,for all the purposes of this Act, the assessee in respect of such income-tax. (3) In the case of a business of which _all the operations are not carried out in British India, the profits and gains of the business deemed under this section to accrue or arise in British India shall.be only such profits and gains as are reasonably attributable to that part of the operations carried out in British India." On behalf of the appellant · it - was contended that in order to _ get exemption from the Exce::s Profits Tax -Act the assessee has to show that his case is covered by section 5 proviso 3. It \vas argued on behalf of the appellant that in the 1950 Co111111issio11cr of /11co111c-tax, Bo111l1ay v. Al1111cdblitri Untarb/Jai [ .. Ca. ff ania C. J. 1950 Co11iu1issioner .of lnco111c-f11x, Bo111!1ay v. Ah1111·dl1hai {/11tafbl1ai & Co. ]{ a1tia C. J. 340 SUPREME COURT REPORTS [1950J present case the business of the assessee consisted of manufacturing and selling oil and unless each of those operations took place at Raichur, "a part of the business" of the assessee was not at Raichur in the Hyderabad State and therefore he was not entitled to the exemption claimed by him. It was secondly contended that even assuming that this was not correct the profits of that part of the business, which was carried on at Raichur, did not accrue or arise in the Hyderabad State because the profits arose on the sale of the oil in Bombay and therefore the assessee's contention was incorrect. Proviso 3 to section 5 of the Excess Profits Tax Act requires the assessee to fulfil three conditions to secure the exemption. They are (I) there should be a part of a business ; (2) that must be in an Indian State ; and (3) profits in respect of which exemption is claimed must accrue or arise .from that part of the business. The appellant's contention is that the part of the business must be a complete unit or as described on his behalf a complete cross-section of the business. It is argued that inasmuch as the sale of the oil in question took place in Bombay the cross-section composed of manufacture and sale did not take place at Raichur in the Hyderabad State and therefore the as· sessee's contention must fail. In my opinion this conten~ tion is unsound. The definition of business in the Excess Profits Tax Act clearly envisages manufacture as a business by itself. It is not necessary that a manufacturer must be a trader in the commodity he manufac- · tures. Similarly because he is a manufacturer and a trader it does not follow that the two activities necessarily become one indissoluble business of which the profits c:rnnot be separately ascertained. Because a man is a mannfacturer, a trader and even an exporter it is not correct to say that unless all the three activities take place in an Indian State he is not entitled to the benefit of the proviso because a part of his busi- · ness is not in the Indian State. The argument of the appellant is that there should not be only a separate composite unit of the assessee's business in an Indian State but that each operation making up the assessee's business must take place in an Indian State. I find no S.C.R. SUPREME COURT REPORTS 341 justification for putting such construction on proviso 3 to section 5. No authority is cited to support such interpretation of the proviso. It is not contended in the present case that the activities of the assessee as a manufacturer are so spread out as to be- incapable of being ascertained as one unit of business in an Indian State. For instance, difficulties may arise if a manufacturer buys groundnuts in one place, has a crushing mill in another place, has a refinery in the third place and packing etc. in a fourth place. .Jt is not disputed here that the assessee's activities as a manufacturer are all in Raichur and ;f so, that set of activities under the definition of " business " in the Excess Profits Tax Act is a complete unit. I have no doubt that on the facts of the present case the manufacturing operations of the assessee are "a part of his business in an Indian State.'.' Those conditions of the proviso are therefore fulfilled. On behalf of the appellant it was pointed out that under section 42 (3) of the Indian Income-tax Act the legislature had made a provision for allocation of profits in respect of different operations of a business, but there was no such corresponding provision in the Excess Profits Tax Act. This contention overlooks section 21 of the Excess Profits Tax Act which expressly makes, amongst others, section 42 (3) a part of the Excess Profits Tax Act for assessing the profits of an assessee. If, therefore, profits can be allocated to the manufacture of oil in Raichur it seems to me clear that the manufacturing activity will be a part of the assessee's business in an Indian State. The next contention of the appellant was that even if a part of the business was in an Indian State the profits accrued or arose only on the sale of the oil in Bombay and no part of the profits of manufacture therefore arose in an Indian State. In my opinion this argument is also unsound. On the sale of goods the assessee receives money. While the receipt of the price is thus in B01μbay it is an entirely different thing to say that therefore the whole profits of the manufacture and sale arose in Bombay. This argument sverlooks the distinction between accruing ·or arising on the one 1950 Cmn111issio11er Of Income-tax; Bombay v. AJ1medbhai Vmarbhai & Ci>. Kania C.J. 1950 Co111111i.-1sioner <8f Inco11i:!-fax1 Bo111'1ay v. Ah11i:•dl1hai U111arbltai & Co. J{auia C. J. 342 SUPREME COURT REPORTS [1950] hand and receipt on the other. Again, the question of profits has to be determined not on receipt of the price of each lot sold by the assessee but the result of all the operations in connection with the manufacture and sale of oil during the accounting year. An individual transaction may result in profit but that will not make the assessce liable if the result of his accounting year's activities is a loss. · It is therefore improper in a case of this kind to consider the sale of oil as the deciding factor either to ascertain profits or to determine the place of the accrual of profits. Several cases were cited at the.Bar dealing with a trader's business where he bought and sold goods. In my opinion those are not relevant to determine the question before us because in the present case the business is of a different nature. In The Commissioner of Taxation v. Kirk (1 ), Lord Davey distinguished Sulley v. Attorney-General (2 ) and Grai?l-ger & Son v. Gough(") on this ground. The place of.sale was not considered the test when the business was of manufacturing and sale. Similarly cases which deal with the liability of the assessee under the Indian Income-tax Act because the profits were received (and not only accrued or arose) in India are also unhelpful. The Judges of the High Court strongly relied on The Commissioner of Taxation v. Kirk ( ') for their conclusion in favour of the assessee. It was a case of mining operations where the mines were in one colony and the sale of the ore in another. Under the Taxing Act in that case, it was observed that it was wholly immaterial whether the person to be taxed resided in the colony or not. Nor was it material whether the income was received in the colony or not, if it was earned outside the colony. The Board attached no importance to the word " derived " which was treated as synonymous with arising or accruing. The real question was what income was arising or accruing to the assessee from the business op~rations carried on by him in the colony. This was considered a question of fact. Under the New South Wales Act the liability to tax has to be decided on the existence of the source of the income in the particular colony and (!) (1900] A.C. 588. (2) (1860] 5 H. & N; 711. (3) (1896] A.C. 325. S.C.R. SUPREME COURT REPORTS· 343 to that extent the liability to tax is based on a different basis. While accepting this distinction, I am how- .ever unable to accept the contention that the source of income can never be the place where the income accrues or arises. In my opinion there is nothing to prevent income accruing or arising at the place of the source. Tf!e question where the income accrued has to be determined on the facts of each case. The income may accrue or arise at the place of the source or may accrue or arise elsewhere, but it does not follow that the income cannot accrue or arise at the place where the source exists. · Therefore it is necessary to ascertain whether that part of the business which is capable of being treated as one separate unit in the Hyderabad State has given rise to the income or profit sought by the assessee to be exempted from taxation in the. present case. On behalf of the respondents our attention was drawn to the International Harvester Company of Canada v. The Provincial Tax Commissioner (1 ). In that case the question was of the liability to tax of a resident outside the province of S, under the Incometax Act of S, in respect of profits arising from the sale in that province of agricultural implements which were manufactured outside the province. Under the relevant Act the tax was leviable on a person residing outside S who was carrying on business in S on the net profit or gain arising from the business of such person in S. The Board held that although t~e profits were all received in S, where the goods were sold, the profits liable to taxation were only the net profits arising from the business in S and therefore the manufacturing profits should be excluded from the assessment. They referred to sections 23 and 24 of the Taxing Act, under which a non-resident person was charged to tax on an apportioned part of profit, which although it might be received outside the province of S cou1d fairly be regarded as having been partially earned inside that province. In my opinion that case substantially helps the contention of the respondents and negatives the appellant's contention. It shows that when the manufacturing portion of the activity of the assessee is in (1) [19,9) A.C. 39. 1950 CoH1111isstoner of l11co111e-tax, Bombay v. All 111ctlhlia i U111arMuri & Co. l\a11ia C. ]. 1950 Co1n111issioner of Inco1nc-ta:i:, Bmnbay v. Ah1n<>db/lai U11urrbhai & Co. /( auia C. J. Paz( Ali J. 344 SUPREME COURT REPORTS [1950] one province and the sale is in another province, the whole profits are not necessarily considered as arising from the sale or at the place of sale although they may be treated as received on sale of the products. Secondly, it shows that profits could be apportioned between the manufacturing and trading activities, particularly when the assessee carried on the business of a manufai:turer and trader together. This decision was sought to be distinguished by the Attorney-General on the ground that sections 23 and 24 of the Taxing Act of that colony made it a completely different scheme of taxation. I do not think that is a good point of distinction, because pro\·iso 2 to section 5 of the Indian Excess Profits Tax Act, read with section 21, prescribes also a scheme in respect of a non-resident although not in the same details or with the same results under •the Indian Act. The expression "part of a business" must in my opinion be read with the same meaning and implication in provisos (2) and (3) to section S of the Excess Profits Tax Act. I am also unable to accept the contention of the. Attorney-General that under our Act there is no scheme of apportionment. -That overlooks, as pointed out above, the provisions of section 21 of the Act, which incorporates by reference amongst others section 42 (3) of the Indian Income-tax Act. In my opinion, therefore, proceeding on the footing that there can arise or accrue profits of the manufacturing activity of the assessee, profits ha Ye accrued to the assessee of a part of the business in an Indian State and they having accrued out of such business carried on in such State are exempted under the third proviso to section S of the Excess Profits Tax Act. For these reasons, in my opinion, the conclusion of the. High Court is correct and the appeal is dismissed with costs. FAZL Au .J.-I agree fully with the judgment of Mahajan J. >atanjali sastri J. PATANJALI SASTRI J.-This is an appeal from a judgment of the High Court of Judicature at Bombay upon a reference made by the Income-tax Appellate- - S.C.R. SUPREME COURT REPORTS 345 Tribunal, Bombay, under section 66 (1) of the Indian 1950 Income-tax Act, 1922, read with section 21 of the Co·11-u1iission-er Excess Profits Tax Act, 1940. of bu:ome-t"x, The respondent firm (herei~after referred to as the Bombay "assessees ") are carrying on the business of manufacv. turing ana dep.ling in oil at Raichur in the Hyderabad Ahmedbhai State and at Bombay which, during the relevant Umarbhai & Co. period, was part of what was then known as British Patanj~astri J. India. The assessees are resident in Bombay and are registered for income-tax purposes, under section 26-A of the Income-tax Act, under the name of Ahmedbhai Umarbhai & Co., while their branch at Raichur is run under the name of Ahmed & Sons. They own three mills at Bombay and one at Raichur for manufacturing oil from groundnuts, and they sell the oil partly af Raichur and partly at Bombay. For the chargeable .accounting period commencing from 31st October, 1940, .and ending on 20th October, 1941, the assessees were assessed to excess profits tax in a sum of Rs. 1,61,807 on their business income of Rs. 6,08,761, including a sum of Rs. 2,49,615 which was said to have accrued or arisen from· sales in Bombay of oil manufactured at Raichur. Part of such oil was also sold at Raichur, but the profits derived from such sales were not included in the assessment, and no question now arises in regard to such profits. For the succeeding period commencing from 21st October, 1941, and ending on 8th November, 1942, a tax of Rs- 2,55,485-1-0 computed on the same basis, was also imposed . on the assessees. The assessees contended that a part of the profits derived from sales in British India of the oil manufactured at Raichur was attributable to the manufacturing operations at H.aichur which are an essential part of their business, and that such profits must be excluded from the assessment, under the third proviso to section 5 of the Excess Profits Tax Act, as having accrued or arisen in the Hyderabad State. The contention was rejected and the whole of the profits arising out of the sales in British India of the oil produced in Raichur were included in the assessments. After unsuccessful appeals to the Appellate 346 SUPREME COURT REPORTS (1950} 1950 Assistant Commissioner, Bombay, the assessees carried the matter to the Income-tax Appellate Tribunal, Conunissioner of Income-tax, Bombay, but with no better result. The assessees Bomhay thereupon applied to the Tribunal requiring them to •· draw up a statement of the case and refer it to the Ahmcdbl•ai High Court at Bombay for decision of the question of U:aarbT1ai & Co. l · d h ' 1 h _ aw mvolve , and t e Tnbunal according y stated t e Patanja!i sastri J. case and referred the following question: "v\'hether on the facts stated above income accruing or arising to the assessees on sales made in British India of goods manufactured in Raichur situated outside British India has been rightly held by the Tribunal as income accruing or arising in British India and was liable to excess profits tax." In the letter of reference they indicated their view on the question referred by stating that the manufactured article received or brought into British India did not include any income, profits or gains, and that such profits and gains, having accrued only after the sale had taken place, accrued or arose in British India. The reference was heard by Chagla C.J. and Tendolkar J. and they were of opinion that the question as framed by the Tribunal " did not really bring out the controversy between the parties." The· learned Judges, after stating the facts of the case,. framed the question thus : " Whether on the facts stated above the profits of a part of the business of the assessees accrued or arose in an Indian State." The· question as reframed is also open to similar criticism, for, it assumes that the manufacture of oil at Raic:hur is " a part of the business" of the assessees, whereas the Commissioner of Income-tax has been seriously contesting that position as the judgment under appeal itself shows. Excess profits tax is a charge on the profits arising out of a business in excess of its normal or standard profits, a business being regarded as the unit of assessment. . " Business" is defined in section 2 (5) of the Excess Profits Tax Act as inclucling, among other things, "11ianufacture," and a proviso to the clause s;iys that "all businesses to which this Act applies I~ s.c.R. SUPREME COURT REPORTS 347 carried out by the same person shall be treated as one business for the purposes of this Act." Section 4 provides for the charge of tax in respect of any business to which the Act applies on the amount by which 1950 C01111nissio11er of Iuco111e-tax~ Bombay the profits during any chargeable accounting period v. · exceed the standard profits. Section 5, on the true Alzmcdb/Jai · U111arbhtri & Co~ interpretation of which the question for determination in this appeal turns, runs thus : Patanjali Sastri J. "5. This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income-tax by virtue of the provisions of sub-clause (i) or sub-clause (ii) of clause (b) of sub-section (1) of section 4 of the Indian Income-tax Act, 1922, or of clause (c) of that sub-section: Provided that this Act shall not apply to any business the whole of the profits of which accrue or arise without British India where such business is carried on by or on behalf of a person who is resident but not ordinarily resident in British India unless the business is controlled in British India : Provided further that where the profits of a part only of a business carried on by a person who is not resident in British India or not ordinarily so resident accrue or arise in British India or are deemed under the Indian Income-tax Act, 1922, so to accrue or arise, then, except where the business, being the business of a person who is resident but not ordinarily resident in British India is controlled in India, this Act shall apply only to such part of the business, and such part shall, for all the purposes of this Act, be deemed to be a separate business : Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State, and where the profits of a part of business accrue or arise in an Indian State, such part shall, for the purposes of this provision, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other part of the busilless shall, for all the purposes of this Act, be deemed to be a separate business.'' 348 SUPREME COURT REPORTS (1950] 1950 As the assessees are resident in British India and the profits of their business in the Hyderabad State Commiperations are not carried out in British India, the 350 SUPREME COURT REPORTS (1950} 1950 profits and gains of the business deemed under this Cmwui,,foncr section to accrue or arise in British India shall be only cf Incom:-tax, such profits and gains as are reasonably attributable Bom'>as to that part of the operations carried out in British v. India." · Ahm_·dbluri It will be seen that these provisions, read together, Umarbhai & Co. lay down a rule of apportionment for ascertaining the Pat,,,,1,-;;,.-;"'''' J. profits of a business. ~art only of whose "operations " are earned out m Bnhsh India where such part could be n!garded as either " a business connection in British India " or " a source of income in British India." They also provide machinery for facilitating collection of the tax from the resident agent where the person entitled to such income is a non-resident. :Now, these provisions are obviously complementary to section 5 proviso (2) of the Excess Profits Tax Act, and unless we read " part of a business " in that proviso as meaning one or more " operations " of the business referred to in sub-section (3) of section 42, the machinery provided in the latter section for collection of the tax leviable on a non-resident person by virtue of proviso (2) will not be applicable, and the scheme of charge and collection in such cases wfll be rendered incoherent. A harmonious interpretation of the scheme requires that the words " part of a business " in proviso (2) must be taken to signify one or more of the operations of the business, and, if so, the same expression used in proviso (3), with which we are here concerned, must also have the same connotation. It follows that the manufacture of oil in the mill at Raichur is a part of the assessees' business. The question next arises whether the profits derived from such manufacture, other than those arising from sales at Raichur which are not now in question, accrued or arose in Raichur, so as to bring the case within proviso (3). It is clear that the oil manufactured at Raichur cannot itself be regarded as income, profits or gains within the meaning of the • Indian Income-tax Act or the Excess Profits Tax Act any more th<:1n the green coffee in Mathias' case (1) which the Privy Council held could not be so regarded. Ill l.l .R. (1939] Mad.178. S.C.R. SUPREME COURT REPORTS 351 The oil is manufactured for purposes of sale in order 1950 that profits may be earned, and such profits are realised Commis.,,. 011,., only when the commodity is sold and not before. But, of Income-tax, as the test of non-liability under proviso (3) is the acBombay cruing or the arising of the profits in an Indian State, ·v. the question is whether the profits, when they do arise Alimet11~1,'.'; from the sales at Bombay of the product of the mill at Umar/Jhm t, Co. Raichur, arose in whole or in part a.t Raichur? Asp tan· 7~astri J pointed out by the Privy Council in Chunilal lvfehta's a ia'. . . case(1 ), the words "profits accruing or arising in" {a country) require a place to be assigned as that at which the trading operations come, whether gradually or suddenly, into existence, and they involve a notion difficult to apply;to particular transactions. The words "ac .. crue or arise," too, have been variously interpreted, and no conclusive or clear test of when or where income can be said to accrue has been formulatetl in the decided cases. The learned Judges in the Court below solved the problem by invoking what they conceived to be the general principle underlying the decision in Kirk's case ( 2 ), namely, the principle of apportioning profits r' as between the different processes employed in producing those profits and the different places where they are employed. The learned Judges disagreed with the view of the Calcutta High Court in Re Mohanpura Tea Co. (s) that the profits accrue or arise only when the goods are sold and at the place where they are sold, and that the decision in Kirk's case ( 2 ) laid down no principle of general application but proceeded on the language of an Australian statute.